What is the fair value option? Briefly describe the controversy of applying the fair value option to financial liabilities.
A fair value option is an accounting option where the company can elect to record fair values in their accounts for most financial assets and liabilities, including bonds and notes payable.
With bonds at fair value, we assume that the decline in value of the bonds is due to an interest rate increase. If not related to changes in credit risks, these gains and losses are recorded in income. In other situations, the decline may occur because the issuer becomes more likely to default on the bonds. That is, if the creditworthiness of the issuer declines, the value of its debt also declines. If its creditworthiness declines, it's bond investors are receiving a lower rate relative to investors with similar-risk investments. Thus, changes in the fair value of bonds payable for a decline in creditworthiness are included as part of other comprehensive income.
If the answers is incorrect or not given, you can answer the above question in the comment box. If the answers is incorrect or not given, you can answer the above question in the comment box.